Company is sitting on a year's worth of unsold inventory, is losing four times its revenue

Veteran phonemaker BlackBerry, Ltd.'s (TSE:BB) fell to a horrific earnings report as it was slammed with losses on unsold devices that compounded already financially painful layoff costs. There were clear signs in the earnings report that BlackBerry is preparing to exit the high-end devices market -- and likely the American market -- within the next couple quarters.

In Q3 (fiscal Q2 2014) the Waterloo, Ontario company "recognized revenue" (aka, sold) only a tiny number of devices compared to its rivals. During the quarter Samsung Electronics Comp., Ltd. (KSC:005930) and Apple, Inc. (AAPL), respectively the number one and number two device makers, alone shipped roughly 120 million smartphones. By contrast BlackBerry -- formerly known as "Research in Motion" -- shipped only 1.9, with shipments in Q3 half of what they were in Q4. In other words, BB was outshipped 100-to-1 by Samsung and Apple alone.

John S. Chen inherited this mess, becoming CEO at the end of Q2.[Image Source: SAP/Sybase]

One reason why BB has hung on as long as it has, despite plunging sales, is that it's been relatively proactive in tapering production. BB's strategy, while clever, has created a lot of confusion.

Since its struggles began around in mid-2010, BB has released two sets of figures -- shipments and sales. The keyword to decoding BB's earnings report is that "recognized revenue on" is being used to imply "shipped", whereas sold, indicates a mix of new and old devices:

Things are looking pretty dire on the handset front, even with BB doing its best to taper.

Note that BB is sitting on 17+ million unsold handsets, still. Also note that it's basically halted production of BlackBerry 10 platform.

Combined with the revenue/earnings numbers and you arrive at a pretty devastating picture, even by BB's standards. During the quarter, BB made $1.2B USD in revenue. The company's pre-tax losses were $4.6B USD. No you did not misread that; BB literally lost close to four times what it sold its devices and services for in the quarter. Even with exclusions for GAAP, the loss still stood at an epic $4.4B USD.

But that's unlikely to be the worst of it for BB. BB has $3.2B USD in cash. In other words it can only survive one more quarter like the last one, unless it finds new sources of debt. Given its poor performance, it's doubtful many investors will be eager to lend it much money -- particularly when it is sitting on a massive unsold inventory of 17 million handsets; basically a full year's worth of stock at current sales levels.

II. BES & BBM -- Bright Spots or Noise?

The good news is that most of the loss is thought to be due to the latest round of layoffs. BB is laying off an additional 40 percent of its workforce, or roughly 4,500 employees, cuts which follow last year's cuts of over 5,000 jobs. Last year these layoffs drove BB to a loss of $235M USD on revenue of $2.9B USD. So it's likely that roughly half of BB's losses came from the layoffs, with inventory write-downs accounting for another half.

Some other parts of the report sound hopeful. For example, in the first seven months (Feb.-Sept. -- or Mar.-Sept. in some regions) on the market, BlackBerry Enterprise Server 10 (BES 10) was sold to only 25,000 servers. In Q3, BB tacked on 5,000 new BES 10 servers, to bring its total BES 7 and BES 10 client base to 80,000 servers in the wild.

BES 10 has seen tepid adoption.

However, that's the glass-half-full outlook. Consider that the subscription numbers are about half what they were at BB's (then RIM) peak in 2009 (150,000 servers) [source; PDF]. Further, nearly two thirds of BB's servers still haven't upgraded to BES 10 -- and it's questionable if they will.

The biggest selling point of BES was always BlackBerry smartphones. BB has tried to become more viable as sales have faded, offering BES support for Google Inc.'s (GOOG) Android and Apple's iOS via products like Fusion. It also tried to cut its fees to win back clients. These cuts, while inevitable, certainly haven't helped BB financially.

And despite the cuts, BES 10 ultimately remains relatively expensive for what it offers; a good value if you use BB10 devices, perhaps. And basically no one uses BB10 devices, so BES 10 is headed the way of the dinosaur, like its smartphone companions.

In two months BB says it racked up 40 million iOS/Android BBM customers. But the only major OEM it scored a bundling deal with was LG Electronics, Inc. (KSC:066570) (the third place smartphone maker in the U.S. behind Apple and Samsung). BBM is perhaps BB's most promising product in the long-term, aside from budget handsets. But it won't be a huge moneymaker, given the abundant competition.

It looks like these handsets will almost all be a new breed of next generation budget handsets. The focus will be on Indonesia -- as the first model's codename "Jakarta" indicates -- as well as "other fast-growing markets" according to CEO John Chen. Production will also be sourced to Mexico, another targeted emerging market.

The devices will likely not be viable in the U.S. or EU -- and perhaps even BB's own home nation of Canada. Despite the abysmal financial Mr. Chen says his firm has a "commitment to the device market for the long-term" -- but he offers no promise of a commitment to the high-end U.S./EU devices market.

BlackBerry Z30: Dead

BlackBerry Q10: Dead

Further evidence of BB10's high end flight is found in the earnings report, in which BB writes:

During the third quarter, the Company [shipped] approximately 1.9 million BlackBerry smartphones compared to approximately 3.7 million BlackBerry smartphones in the previous quarter. Most of the units [shipped] were BlackBerry 7 devices.

BB has almost completely ended production of its high end BB10 fleet. The Z10, in particular -- while arguably BB's strongest attempt to compete with Android, Windows Phone, and iOS -- also proved the company's worst failure. BB singled it out in Q2 (fiscal Q3 2014) for poor financials.

Blackberry Z10: Dead

In that regard the Z10, Z30, and Q10 (BB's four BB10 handsets to date) may be the last of their kind. BB will likely focus on slightly lower-end devices more akin to its current BB7 models. Jakarta will be 3G-only (no LTE; further proof that the device has no place in developed markets) and will launch in March or April 2014, according to Mr. Chen's earnings call comments.

Thus as Commander Spock would say, "It's life, Captain, but not life as we know it."

Named after Jakarta, Indonesia [pictured], BB's new BB10 device will lack LTE and likely marking an end to U.S. sales. [Image Source: Real Jakarta]

The BlackBerry U.S. consumers knew -- a premium devicemaker -- is effectively dead. It will taper down for a couple quarters, but even if it hangs on, its own imprint on developed markets is expected to be a handful of apps and services.

The question, though, is whether BB can survive that restructuring. Q1 2013 (fiscal Q4 2014) for BlackBerry will certainly see a smaller loss given layoffs being wrapped up. But with nearly 17+ million handsets left unsold BB must tread carefully to avoid a lethal write-down, given its relatively small cash pile and weak position.